ASPS - Altisource

[netnet]

I have done a bit more research and I'm liking ASPS.  The question now for me is whether to stick a toe in and buy more when the DFS settlement comes or just wait until the settlement.  I don't mind chasing if it is 'only' up 30% the first day or so.

 

On the downside what is the absolutely worst case scenario? How much pain can an irrational Lasky inflict? I can't imagine that he would shut down either company. But looking over his record and his powers, well he could do some really significant damage even at these prices.  At least that is what I think.

 

Thoughts?

[Fat Pitch]

I have done a bit more research and I'm liking ASPS.  The question now for me is whether to stick a toe in and buy more when the DFS settlement comes, I don't mind chasing if it is 'only' up 30% the first day or so.

 

On the downside what is the absolutely worst case scenario? How much pain can an irrational Lasky inflict? I can't imagine that he would shut down either company. But looking over his record and his powers, well he could do some really significant damage even at these prices.  At least that is what I think.

 

Thoughts?

 

Establishing a position pre and post settlement is probably wise.

 

As for the worst case that could entitle Ocwen being shut down. Though I don’t think that’s likely. It’s best to look at the company without Ocwen and related party revenues. If you are comfortable with that and factor in the run off from Ocwen is worth close to half the current market cap then you got a very cheap SaaS company in the Real Estate industry.

 

If Ocwen can continue then well you got yourself a home-run.

[usdtor05]

Glenn,

 

Are you still going with the idea that the forced placed insurance is going to come out through the intangible write-off or has anything else changed your mind to make you think this was recurring. 

 

 

[ItsAValueTrap]

Glenn,

 

Are you still going with the idea that the forced placed insurance is going to come out through the intangible write-off or has anything else changed your mind to make you think this was recurring.

 

I think that most of it is non-recurring... though we'll see once the 10-K comes out.  It could be that a small portion of it is recurring if Altisource was helping non-Ocwen customers purchase insurance (e.g. group buying).

[usdtor05]

Remind me, I am slow here (I have read everything you have written on this and the filings and still not sure), why you think this would be non-recurring.

 

Is the summary of your thesis that ASPS would not have entered into an agreement where they get commissions on Ocwen's (mortgage borrowers') cost because that would be ASPS taking advantage of the relationship, and Erbey wouldn't do that?

[ItsAValueTrap]

Remind me, I am slow here (I have read everything you have written on this and the filings and still not sure), why you think this would be non-recurring.

 

Is the summary of your thesis that ASPS would not have entered into an agreement where they get commissions on Ocwen's (mortgage borrowers') cost because that would be ASPS taking advantage of the relationship, and Erbey wouldn't do that?

 

Ocwen probably sold all of its kickbacks for a lump sum fee.

https://glennchan.wordpress.com/2014/11/13/aspsocn-kickbacks-on-force-placed-insurance-revisited/

[colinwalt]

Remind me, I am slow here (I have read everything you have written on this and the filings and still not sure), why you think this would be non-recurring.

 

Is the summary of your thesis that ASPS would not have entered into an agreement where they get commissions on Ocwen's (mortgage borrowers') cost because that would be ASPS taking advantage of the relationship, and Erbey wouldn't do that?

 

Ocwen probably sold all of its kickbacks for a lump sum fee.

https://glennchan.wordpress.com/2014/11/13/aspsocn-kickbacks-on-force-placed-insurance-revisited/

 

But if that's the case, then shouldn't this income have shown up as a one time (non-recurring) payment of some kind?

 

I'm not as familiar with the financials here as you are Glenn, but I don't believe that's the case. And if it was the case, then there shouldn't have been a need to make a special announcement that this income was coming to an end.

 

I guess I'm missing something, but the "lump sum fee" doesn't quite make sense to me....

[rayfinkle]

Remind me, I am slow here (I have read everything you have written on this and the filings and still not sure), why you think this would be non-recurring.

 

Is the summary of your thesis that ASPS would not have entered into an agreement where they get commissions on Ocwen's (mortgage borrowers') cost because that would be ASPS taking advantage of the relationship, and Erbey wouldn't do that?

 

Ocwen probably sold all of its kickbacks for a lump sum fee.

https://glennchan.wordpress.com/2014/11/13/aspsocn-kickbacks-on-force-placed-insurance-revisited/

 

But if that's the case, then shouldn't this income have shown up as a one time (non-recurring) payment of some kind?

 

I'm not as familiar with the financials here as you are Glenn, but I don't believe that's the case. And if it was the case, then there shouldn't have been a need to make a special announcement that this income was coming to an end.

 

I guess I'm missing something, but the "lump sum fee" doesn't quite make sense to me....

 

Purchase price for homeward.

[ItsAValueTrap]

A number of different news article have suggested that Ocwen/Altisource and Nationstar have tried to disguise kickbacks on force-placed insurance.

 

In the case of Ocwen/Altisource.

 

Ocwen sells a "business" to Altisource.  Altisource sends Ocwen a one-time lump sum payment.

Ocwen agrees to allow Altisource to direct the purchasing of force-placed insurance.  Altisource keeps any kickbacks generated.

 

In theory, Altisource is offering insurance brokerage services.  So, both companies can pretend like Ocwen isn't receiving kickbacks on force-placed insurance.

 

2- Accounting:

The contract between Ocwen and Altisource creates an intangible asset on Altisource's balance sheet.  This represents all of the future kickbacks.

*It could be recorded as deferred revenue (which was the case for Beltline); however, the numbers wouldn't add up if that was the case.

 

That's my theory anyways.  Once the 10-K comes out, a big impairment charge at ASPS would confirm my theory.

[ItsAValueTrap]

Looking at WAC versus NSM versus OCN+ASPS...

 

With WAC, it is very easy to figure out how much they receive each year in kickbacks.  Just look at the insurance revenues line.  WAC discloses in its 10-K somewhere that it doesn't do any insurance underwriting and doesn't take risk.  Well if they aren't doing any real insurance, then insurance revenues are likely 100% kickbacks.

 

With NSM, the kickbacks are lumped in with other revenues.

 

With OCN+ASPS, there's practically no mention of kickbacks on force-placed insurance.  The OCN 10-K for YE2012 discloses a subpoena relating to force-placed insurance.  However, there isn't a lot of other information on force-placed insurance.  Basically... looking at the OCN and ASPS 10-Ks I could not figure out how much was received for kickbacks on force-placed insurance.

 

Maybe they didn't think that it would be an issue because of the way they structured it.  Maybe they didn't think that it was material enough to mention in their risk factors.  I don't know.  It's just that there wasn't a lot of transparency there.

[colinwalt]

A number of different news article have suggested that Ocwen/Altisource and Nationstar have tried to disguise kickbacks on force-placed insurance.

 

In the case of Ocwen/Altisource.

 

Ocwen sells a "business" to Altisource.  Altisource sends Ocwen a one-time lump sum payment.

Ocwen agrees to allow Altisource to direct the purchasing of force-placed insurance.  Altisource keeps any kickbacks generated.

 

In theory, Altisource is offering insurance brokerage services.  So, both companies can pretend like Ocwen isn't receiving kickbacks on force-placed insurance.

 

2- Accounting:

The contract between Ocwen and Altisource creates an intangible asset on Altisource's balance sheet.  This represents all of the future kickbacks.

*It could be recorded as deferred revenue (which was the case for Beltline); however, the numbers wouldn't add up if that was the case.

 

That's my theory anyways.  Once the 10-K comes out, a big impairment charge at ASPS would confirm my theory.

 

The problem I have with this theory is that, if true and if I understand correctly, then the income represented by those kickbacks was going to end at some relatively near point in time (end of 2015?). And if that's the case then it follows (it seems to me), that ASPS has been implying that the kickbacks represented on ongoing stream of income, lasting far beyond the end of 2015.

 

And I don't see how ASPS could have implied such a thing - that borders on fraud I would think.

 

Of course, it still doesn't explain why they described the loss of income as only having an impact until 2015 YE - very strange - why put an end date on the impact - are they expecting to be able to replace the lost income with some alternative that would give them the same amount of income, say a "forced place insurance" wholly owned subsidiary?

 

It just doesn't make sense to me... I guess we'll know more in time...

[ItsAValueTrap]

that ASPS has been implying that the kickbacks represented on ongoing stream of income, lasting far beyond the end of 2015.

 

I don't think they did that.  However, the press release was a little cryptic.  It said "average of".

 

Homeowners with insurance policies placed via this program will experience no impact to their coverage as a result of this decision. The discontinuation of this business line is expected to reduce Altisource's quarterly diluted earnings per share by an average of approximately $0.50 - $0.65 for the period October 1, 2014 through December 31, 2015.

http://ir.altisource.com/releasedetail.cfm?ReleaseID=882365

[usdtor05]

Glenn is it fair to say that outside of the technology ASPS sells to OCN, they don't really get involved until there is a delinquency at which time they start selling their ancillary services that Lawsky loves so much?

 

So basically OCN handles everything up to the point of delinquency in which case here comes ASPS.

[ItsAValueTrap]

Glenn is it fair to say that outside of the technology ASPS sells to OCN, they don't really get involved until there is a delinquency at which time they start selling their ancillary services that Lawsky loves so much?

 

So basically OCN handles everything up to the point of delinquency in which case here comes ASPS.

 

No.

 

The broad picture is:

 

If the business generates high returns on capital, it is probably in Altisource.  If it has low returns on capital, it is probably in Ocwen. 

 

So all of the technology stuff ends up in Altisource.  Stuff that scales.  But stuff like the debt collection (e.g. credit cards) business is in Altisource.  Altisource tries to get an edge in debt collection from offshore labour, a little bit of technology, psychology, etc.  I believe its debt collection business is not growing.

 

There's an IT system that handles the collection of a current mortgage.  That system has to calculate the correct escrow payments, which is actually somewhat complicated since it depends on the state's laws, federal law, the mortgage contract, the servicing contract, etc.  Altisource provides the technology.

 

Also see this post: https://glennchan.wordpress.com/2014/08/09/what-ocwen-and-altisource-do/

[ItsAValueTrap]

that Lawsky loves so much?

 

Maybe Lawsky assumed that Ocwen was guilty because anybody who can do something 70% cheaper "must" be cutting corners.  It says so right in his speech.

http://www.dfs.ny.gov/about/press2014/pr1405201.htm

 

[usdtor05]

I went back and read the speech and the filings. The filings are clear they are 70% on handling non-performing non-agency...not just 70% better across the board. So I think his comment was a bit disingenous.

[usdtor05]

One more thing if we look at ASPS Mortgage Services which is 2/3 Ocwen and the majority of their revenue it is:

 

Mortgage Services : Provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, originators and investors in single family homes. We provide these services primarily for loan portfolios serviced by Ocwen Financial Corporation and its subsidiaries (“Ocwen”). We also have longstanding relationships with commercial banks, insurance companies and mortgage bankers. Within the Mortgage Services segment, we provide the following services:

 

Asset management – Asset management services principally include property preservation, property inspection, real estate owned (“REO”) asset management, the Hubzu ® consumer real estate portal and REO brokerage services. We also provide property management, lease management and renovation management services for single family rental properties.

 

Insurance services – Insurance services include an array of title insurance services, including pre-foreclosure, REO and refinance title searches, title insurance, settlement and escrow services. We also provide insurance program management, loss draft claims processing, insurance agency and brokerage services for lender placed and REO insurance companies.

 

Residential property valuation – Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company and alternative valuation products, some of which are through our network of real estate professionals. We generally provide these services for residential loan servicers, residential lenders and investors in single family homes.

 

Default management services – Default management services principally include foreclosure trustee services for loan servicers and non-legal processing and related services for and under the supervision of foreclosure, bankruptcy and eviction attorneys.

 

Origination management services – Origination management services principally include Mortgage Partnership of America, L.L.C. (“MPA”) and our contract underwriting and quality control businesses. MPA serves as the manager of Best Partners Mortgage Cooperative, Inc., which is referred to as the Lenders One Mortgage Cooperative (“Lenders One”), a national alliance of independent mortgage bankers that provides its members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. We provide other origination related services in the above residential property valuation and insurance services businesses.

 

I guess it just feels like these are all (except origination) items that would occur post delinquency which is why I was asking about exactly what their role is (outside the IT which I get).

[ItsAValueTrap]

Altisource makes A LOT more money if mortgages are delinquent.

[usdtor05]

Do you see any risk that the DFS tries to force Ocwen to consider using other service providers outside of ASPS if they can't prove that ASPS is the cheapest option for borrowers/investors?

[Fat Pitch]

Do you see any risk that the DFS tries to force Ocwen to consider using other service providers outside of ASPS if they can't prove that ASPS is the cheapest option for borrowers/investors?

 

I believe Altisource charges $48/yr for each loan serviced on their platform. That is really really cheap when I look at other companies for sub servicing options. Delinquent non agency loans cost ~$400 per quarter through Altisource. I'm not sure how that compares to the industry average. I wonder why the delinquent GSE loans only cost $150/quarter to service?

 

If a loan is foreclosed on then it gets kicked over to Hubzu to get auctioned off for a 4.5% commission. Erbey definitely put together a fee generating cash cow. Would the DFS take issue with that? Probably, but that's still cheaper than what sales broker charges and they are up in arms about it.

 

As for the DFS forcing Ocwen to use other services, that's going to be a tough call. I don't think anyone else in the industry spent more than Ocwen and Altisource on R&D and collected decades of data to be used for their services. I think Wilbur Ross came out saying that no one can do what Ocwen does for cheaper.

 

[ItsAValueTrap]

Ocwen provides some estimates about the cost of servicing loans:

The primary assumptions we use to estimate the fair value of MSRs by strata as of December 31, 2011 include the cost of financing advances (1-month LIBOR plus 4%), float earnings (1-month LIBOR), a 20% discount rate and the cost of servicing (representing industry averages, which vary by strata and ranged from $110 (in dollars) per year for a performing ALT A loan to $1,500 (in dollars) per year for a loan in foreclosure).

http://shareholders.ocwen.com/secfiling.cfm?filingID=1019056-12-280

 

Altisource provided information about Altisource's revenue per loan in their investor presentations.

 

Altisource's revenues and Ocwen's expenses don't mirror each other.  Suppose that Ocwen purchases $100 of servicers from Altisource on behalf of the mortgage investors as permitted by the servicing contract.  Ocwen's cost would be the expense of financing that $100 until it gets its advance back.  So if Ocwen's cost of capital on advances is 9% (obviously their real cost is much lower) and it takes a year to get their advance back, then the expense is $9.

 

Do you see any risk that the DFS tries to force Ocwen to consider using other service providers outside of ASPS if they can't prove that ASPS is the cheapest option for borrowers/investors?

 

They can't make up new laws.  They can enforce existing ones.  I don't think any of the existing laws would allow them to force Ocwen to use somebody other than Altisource.  (Though they can use existing laws to extort companies.)

 

I don't think it would make any sense for them to prevent one company from using another company.  I don't see why that would make any sense.

[Fat Pitch]

http://www.marketwatch.com/story/ocwen-announces-253-million-early-buyout-of-mortgages-from-ginnie-mae-pools-2014-12-12

 

Guess Ocwen isn't completely shut out of the markets.

[usdtor05]

Turned around and sold them to a unrelated third party. So they serviced them already but then bought them and sold them to someone else?

 

Feels like RESI but not sure they would say an unrelated third party.

[ItsAValueTrap]

For Ginnie Mae mortgages, the servicer has the option of doing early buyouts.  If that option is exercised, then the mortgage investors in the Ginnie Mae MBS get hurt a little.  It's similar to prepayment risk for the mortgage investors.

 

After doing the early buyout, the servicer is incentivized to get the loan performing again.

 

Buying these loans is capital intensive.  So, the servicer can re-securitize/re-pool the loans and sell them again but keep the servicing rights.

 

That's what I've figured out so far.

 

2- I think that Ocwen will still prefer to own other types of MSRs.  They will make the most money with non-agency MSRs with high delinquencies due to their cost advantage in handling delinquent mortgages.  In one instance I believe Ocwen got a MSR for free because the previous owner could not service it profitably.

[usdtor05]

all of that makes total sense I was just wondering if it was RESI.

 

Do you guys ever look at the UPB to market cap...tells a very interesting story if they can get the DFS behind them.

 

I think we sometimes make this complicated but if they can get that behind without a huge modification to business practices and can start buying, the MC in the 2009-2013/UPB was at least double where it is now.

 

ASPS of course should do even better given their economics, unfortunately there are not any LEAPS on ASPS that I have found